Business Objectives!

Question 1

What’s production theory in the short run?

Answer 1

In the short run, at least one factor input is fixed, normally land or capital. The variable factor is labour. To increase output to meet demand, a firm will employ more labour. However, as you increase labour, the additional labour becomes more inefficient because you are increasing labour with a fixed input, and the law of diminishing returns sets in.

Question 2

What’s production theory in the long run?

Answer 2

In the long run, all factor inputs are variable and the firm can benefit from returns of scale.

Question 3

What are the 6 internal economies of scale?

Answer 3

Bulk buying
Marketing
Managerial
Technical
Financial
Risk bearing

Question 4

What are the 4 external economies of scale?

Answer 4

Infrastructure
Location
Supply chain
Skilled workforce

Question 5

What are the 6 diseconomies of scale?

Answer 5

Culture
Communication
Control
Conduct
Coordination
Cooperation

Question 6

What are economies of scale?

Answer 6

The benefits gained from being a large organisation.

Question 7

What are diseconomies of scale?

Answer 7

The problems that arise from getting ‘too large’.

Question 8

Who takes ownership in a small to medium sized organisation?

Answer 8

In a small to medium sized organisation (smo), which is usually 9-200 people and usually a limited company, the owners are the shareholders and they have day to day control of the firm.

Question 9

Who takes ownership in a large organisation?

Answer 9

In a large organisation, usually a PLC, the shareholders appoint directors to run the business on their behalf. However, this can cause the principal agent problem (PAP), also known as the separation/divorce of ownership of control.

Question 10

What are the 6 business objectives?

Answer 10

Profit Maximisation
Revenue Maximisation
Sales Maximisation
Satisficing
Low cost producers
Not for profit

Question 11

What are the 7 stakeholders?

Answer 11

Shareholders
Employees
Suppliers
Customers
Community
Government
Financial Institutions

Question 12

What’s satisficing?

Answer 12

Where you make sufficient profits to satisfy everyone. There’s been a compromise between the shareholder (principle) and the director (agent).

Question 13

What’s a low cost producer?

Answer 13

Where a firm aims for the maximum level of output with a minimum level of input. Firms operate at the lowest point on the LRAC curve and benefit from absolute advantage.

Question 14

What are the motives of the different objectives?

Answer 14

Profit Maximisation - Profit
Revenue Maximisation - Managerial
Sales Maximisation - Market Share
Low cost - Cost

Question 15

What are the solutions to overcome the principle agent problem?

Answer 15

Share-ownership schemes
Regular meetings and clearly defined objectives
Performance-related pay
Non-pecuniary benefits

Question 16

What are the pros of profit maximisation?

Answer 16

Shareholder value increased - attracts funding
Profits can be reinvested

Question 17

What are the cons of profit maximisation?

Answer 17

Lowering costs involved cutting jobs
Shareholders are prioritised over other stakeholders

Question 18

What are the pros of revenue maximisation?

Answer 18

Creates barriers to entry for new firms
Can result in long run supernormal profits

Question 19

What is the con of revenue maximisation?

Answer 19

Higher costs on wages

Question 20

What are the pros of divorce of ownership?

Answer 20

Profit maximisation may not be sustainable for long term growth
Profit maximisation affects other stakeholders’ welfare
Rewarding shareholders lowers investment
Profit maximisation can lead to tired labour and reduced quality

Question 21

What are the cons of divorce of ownership?

Answer 21

Diseconomies of scale via disagreements
Satisficing behaviour - managers meeting minimum levels of achievement
Profit maximising can attract new shareholders